According to the EU Commission, highly indebted European countries should be given more flexibility to reduce irregular debt. Instead of uniform guidelines for all countries, the authority relies on individual ways for each country to reduce debt and deficits in the long term, as can be seen from a reform proposal presented today. “We need fiscal policy rules that meet the challenges of this decade,” said Commission President Ursula von der Leyen. It was still unclear whether the reform proposals would be acceptable to the federal government.
The rules prescribe upper limits for the EU states. According to the proposal, the goals of the so-called Stability and Growth Pact of limiting debt to a maximum of 60 percent of economic output and keeping budget deficits below 3 percent remain in place. However, there should no longer be any uniform requirements, especially for reaching the 60 percent target: Individual plans should give countries with excessive debt more time and flexibility. The monitoring of implementation is also to be simplified. Violations should be easier to punish. The member states and the EU Parliament must now negotiate the proposed reforms.
EU Commission: We live in a different world
“We live in a very different world than 30 years ago. Different challenges, different priorities,” said Commission Vice-President Valdis Dombrovskis. The new rules would have to reflect these changes. “The EU also faces a massive need for reform and investment for the green and digital transition, to strengthen our social and economic resilience and to secure long-term energy supply.”
The heavily indebted countries would have more time under the proposal to reach the deficit target and reduce their debt. According to the proposed law, as long as the deficit is above three percent of gross domestic product (GDP), the “corrected net expenditure path” of the countries must be adjusted by at least 0.5 percent of GDP every year. According to a Commission spokeswoman, it is about the structural balance with the exception of temporary measures. These could be corona aid or spending on climate protection. The balance is the difference between the expenditure and income side.
In the month-long debate about the new rules, Germany had called for minimum requirements. However, according to the Ministry of Finance, countries with high debt ratios should have to reduce them by at least one percentage point per year. For countries with medium debt ratios, it should be half a percentage point. The positions on the debt rules are very different in the individual EU countries.
Debt rules are to apply again from 2024
The rules were temporarily suspended due to the Corona crisis and the consequences of the Russian attack on Ukraine. They should apply again from 2024. So far, states have normally had to repay five percent of debt that is above the 60 percent mark per year. For highly indebted countries such as Italy or Greece, this would be devastating for growth. Even before the pandemic, the rules were often disregarded – also by Germany.